5 common tax myths could cost you thousands
Fact: Taxes are confusing — and it doesn’t help that there are so many myths that swirl around the subject.
It makes sense though. The subject is LOADED with heated beliefs and emotions.
However, knowing how to separate fact from fiction is crucial to avoiding an audit and penalties, and making sure taxes aren’t a source of stress. At IWT, we believe taxes shouldn’t decide your rich life for you.
Let’s debunk the 5 most persistent tax myths so you can get through tax season without a hitch.
5 tax myths you shouldn’t believe
To address these tax myths, I’m going to do my best Adam Savage and Jamie Hyneman impression and tackle it MythBusters-style, labeling each one of the following:
- PLAUSIBLE. If the myth can be applicable to certain taxpayers.
- BUSTED. If the myth is not true at all.
NOTE: Don’t expect the same amount of explosions and scientific ingenuity as the actual MythBusters.
Tax myth #1: Filing your taxes is voluntary
Though it might seem painfully obvious to some, filing your taxes is NOT voluntary. That means you can’t “opt out” of paying them.
People who believe your taxes are voluntary generally point to a passage in the Form 1040 instruction book that states that the tax system is voluntary. More specifically, “our system of taxation is based upon voluntary assessment and payment, not upon distraint.”
However, this doesn’t mean that you can just avoid paying your taxes.
So many people believe this that the IRS had to include it in their page on “The Truth About Frivolous Arguments.”
From the IRS:
“The word ‘voluntary’ […] refers to our system of allowing taxpayers initially to determine the correct amount of tax and complete the appropriate returns, rather than have the government determine tax for them from the outset.”
This means that taxpayers can file their own taxes OR have the government do it for them. It does not indicate that taxpayers don’t have to pay their taxes.
ACTION STEP: Pay your taxes.
Taxes are not voluntary and you must pay them. Be sure to report all of your earnings and give Uncle Sam his due.
Tax myth #2: Students don’t have to pay taxes
While not all students have to file income taxes, students who earn more than $12,000 a year do, according to TurboTax. It doesn’t matter if you go to school full time. You need to file your income taxes.
However, that comes with a big caveat. If your parents still claim you as a dependent (which they can do until the age of 24 if you’re a student), you can avoid taxes if you meet certain stipulations.
Before we jump into those stipulations, it’s important you understand the two different kinds of income:
- Earned income. Wages and salaries you earn via your job.
- Unearned income. Money earned via investments such as interest and dividends.
According to the IRS, single dependents under the age of 65 (who are not blind) must file income tax if they have more than$6,350 in earned income, or more than $1,050 in unearned income.
These rules change according to the status of the dependent. For example, if you’re 65 or older (or blind), you’ll pay income taxes if you have more than $7,900 earned income, or more than $2,600 unearned income.
For the full list of rules for dependents and tax filings, check out the IRS page here.
Also, it’s worth noting that you don’t have to pay taxes on your financial aid, such as grants and scholarships.
ACTION STEP: Check to see if you have to pay taxes.
If you’re a student and earned more than $12,000 in income this past year, you’re likely going to have to pay taxes on that. Make sure that you do to avoid being audited.
To help, the IRS has provided a handy “quiz” to determine if you have to file a tax return.
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Tax myth #3: You can file your pets as dependents
While Fido can do a lot of tricks, the one thing he can’t fetch you is a tax break as a dependent.
Yes, we know. Pets are EXPENSIVE. It’s estimated that pet owners spent more than $72 billion on their furry ones in 2018, according to the American Pet Products Association. And any owner will tell you that caring for their pets is essentially like taking care of a child.
Unfortunately, the IRS does not recognize Snowball as a dependent no matter how much you love them.
HOWEVER, there are ways your pets can be leveraged on your taxes — specifically through deductions.
If your pet is a service animal like a guide dog or if you have a therapy animal, you can deduct expenses you incur from training, purchasing, vet care, and buying food.
From the IRS:
“You can include in medical expenses the costs of buying, training, and maintaining a guide dog or other service animal to assist a visually impaired or hearing disabled person, or a person with other physical disabilities. In general, this includes any costs, such as food, grooming, and veterinary care, incurred in maintaining the health and vitality of the service animal so that it may perform its duties.”
You must keep a detailed record of all of these instances though, as the IRS will want proof that 1. You actually need a service animal and 2. your service animal is actually trained to help you.
Also, if you run a business and you have a guard animal, you can deduct its expenses from your taxes as well. Your guard dog is an integral part of keeping your business safe. As with service animals, you can deduct vet care, food, training, and purchases expenses.
ACTION STEP: Deduct your service animal and/or therapy animal’s expenses.
If your animal is integral to your business and/or well-being, see if you can deduct it from your taxes this year. For more information, check out the IRS’s guidelines on the subject.
Tax myth #4: Your accountant is on the hook for filed tax mistakes
Financial experts are a dime a dozen. But a good financial expert who actually knows what they’re doing is rare.
Which is why it should come as no surprise that accountants get things wrong sometimes. When they do, it could result in an audit for you.
That’s right. It’s not on your accountant. It’s entirely on you.
You can avoid financial disaster at the hand of your accountant by doing two things:
- Finding a good one
- Double checking their work
You can make sure a tax preparer is reputable by asking for their Preparer Tax Identification Number. The IRS requires that they have this number to legally prepare someone’s federal tax returns.
You can also make sure that they are licensed as a CPA, tax attorney, or have gone through the IRS Annual Filing Season program.
No matter what their credentials are, you should make sure you double check their work. Go through the filing once they’re finished to make sure everything is covered. Do that and you’ll best prime yourself for a mostly smooth tax season.
ACTION STEP: Find a reputable accountant and double check their work.
It’s important to make sure you find a reputable professional to handle your financial needs during tax season. Sure, they might be expensive, but do you know what’s more expensive? An audit!
Tax myth #5: Your “home office” gives you a deduction
Maybe your company lets you work from home once a week. Maybe you work remotely from home all the time.
No matter the case, you’re probably wondering if you can start deducting things such as your internet bill, office desk, computer, cheesy motivational posters, and everything else you need to get work done.
However, this might not be the case for you. In fact, the IRS outlined two requirements you need to meet before you can start deducting things from your home office:
- Regular and exclusive use
- Principal place of your business
Regular and exclusive use refers to you using a section of your house exclusively for your business. That can mean things like a spare bedroom you’ve converted into an office, or a workshop where you do all of your work.
Having a room isn’t enough though. You also need to prove that your house is your principal place of your business. That means you “have in-person meetings with patients, clients, or customers in your home in the normal course of your business,” according to the IRS.
ACTION STEP: Determine whether or not you can deduct your home office.
Ask yourself: Do I use this space exclusively for my business? Does the majority of my business occur here?
Your deductions are based on the percentage of your home that’s devoted to your business. To calculate it, take the following steps:
- Step 1: Find the square footage of your home. If you don’t know the square footage, you can call your county assessor’s office and they’ll be able to tell you.
- Step 2: Measure the square footage of your home office. (E.g., If your office is 10 x 16 feet, your square footage will be 160 square feet).
- Step 3: Divide your home office square footage by the total square footage of your house. (E.g., 160 sq ft / 2000 sq ft = .08).
- Step 4: Multiply the number by 100 and then you’ll have the percentage of your home office in relation to your house. (E.g., .08 x 100 = 8%).
You’ll now be able to deduct that amount from the total cost of your home.
So let’s say with utilities and mortgage, the annual amount it takes to run your home is $20,000. $20,000 x 8% = $1,600
At tax season, you’ll be able to deduct $1,600 due to your home office.
Make sure you’re ready for tax season
The world of taxes is a confusing Kafkaesque minefield. To help you navigate it, be sure to check out our resources below:
- How much do I get back in taxes?
- Why your parents are delusional about tax refunds
- A quick guide to itemized deductions
Now we want to turn it to you: What tax myths have you noticed? Are there any out there that make you roll your eyes when you hear them? We’d love to hear from you on social media. We debunked even more tax myths in this post on Instagram, leave us a comment and let us know what ones we missed.